Wow! The food stamp program is now equivalent to 14 percent of all U.S. grocery store sales.

Though the Fed indirectly finances the food stamp program with its purchase of treasury securities — $45 billion per month starting in January — we wouldn’t be surprised someday that the central bank actually begins to print food stamps. This wouldn’t pack the potential punch of creating “high powered” bank reserves, which can be multiplied in a healthy financial system through credit creation, however. But at least the “printed money food stamps” would lead to direct demand creation, rather than, as most of it does now, sits on deposit at the Fed in the form of excess bank reserves.

Seriously. Monetary policy has almost become this absurd.

What if the Fed’s policies actually contribute to unemployment? Such as repressing and changing the relative cost of capital. This makes it easier for companies to finance machinery which either enhances labor productivity, reducing the need for more workers, or less costly to replace workers with robots. Clearly, some of this is currently taking place.

The Fed’s policy of repressing government borrowing costs and indirect deficit financing reduces the government’s incentive to implement the necessary structural reforms to put the budget on a sustainable path. This would reduce uncertainty and maybe give the business sector more confidence to hire and spend their cash hoard.

We’re starting to think that the business sector behaves according to the Ricardian equivalence model. Consumers? We are not so sure. Great thesis for a Ph.D. dissertation, by the way.

In other words, the probability the Fed has the wrong, or, at the very least, flawed model of the economy (think Apple maps instead of Google maps) is much larger than is priced, in our opinion. This wouldn’t be the first time. No problem now, but if the Fed loses cred with such a ballooned balance sheet, the demand for money could become more unstable or collapse.

It would, at first, feel nice as equities would shoot to the moon. Beyond the short-term, however, we would be in a heap of trouble, with a capital T, right here in River City! Big trouble.

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